Johnson reshuffles his cabinet, what does it mean for investors?
Boris Johnson announced his arrival at Number 10 last week with one of the most comprehensive -and arguably ruthless – Cabinet reshuffles in modern history. With so many new arrivals in Cabinet, the biggest questions for investors will be the style of governance of the new PM, his policy priorities (other than Brexit, of course), and whether and to what extent his infamous “f*ck business” comment will reflect his approach now he’s in office.
Whilst the immediate priority within government remains that of no-deal preparations, Johnson has started his time in Number 10 with a bang, announcing a raft of new spending initiatives designed to boost domestic growth, particularly in the “left behind” regions, such as the post-industrial communities in the Midlands and North that swung heavily behind the Leave campaign in 2016. Johnson is likely to stick to this approach in the coming months, combining tough talk on Brexit with a feel-good domestic agenda based on significantly increased government spending.
With so little policy decided, the most useful indicators are the new Cabinet Ministers themselves, and their own priorities in key sectors. Johnson’s preference as a leader will be to delegate much of the decision making to Cabinet Ministers while positioning himself as a ‘figurehead’ for the government, in much the same way he did at City Hall. Investors should expect each government department to have significantly more free rein to pursue policy objectives than under Theresa May’s tenure, setting the scene for a faster pace of policymaking, driven by the individual goals and interests of Ministers.
A key player in unlocking all this newly promised money will be Chancellor Sajid Javid, who has championed increased spending across government in the past. Johnson’s early priorities of increased spending on schools, the police, housing and infrastructure are all causes Javid has supported in the past, often clashing with May in doing so. He continued this advocacy during the leadership campaign, promising a £100 million infrastructure fund and greater support for house building should he be chosen to lead the party. With Javid now settling in at Number 11, expect considerably less resistance to higher spending from the Treasury than we saw during Phillip Hammond’s tenure.
Health and Social Care
Although Matt Hancock remains in post at the Department of Health and Social Care, there is likely to be a shift in some of Hancock’s core policies – from softer issues like prevention and tech, to stronger vote-winners, including significant investment in hospital upgrades and progressing social care funding reform.
During his leadership campaign, Johnson’s libertarian instincts prompted him to suggest a rethink on the expansion of ‘sin taxes’ – including the controversial sugar tax – which was a key aspect of Hancock’s newly announced prevention model. So while Hancock had made a big push on prevention over the past year, his main proposals may never be implemented.
On the capital investment front, NHS trusts and providers have become increasingly strident in their calls for more money for buildings and equipment. Getting more money to the frontline is seen as a potential vote winner and a way to counter Labour’s traditional strength on the NHS. For investors, it also opens up opportunities for providers of services, upgrades and equipment across healthcare estates.
Social care reform continues to be challenging as the government balances the need to be seen to take action on the issue with the risk of public backlash against the proposals. If Johnson ploughs on without calling a general election, his working majority of two means getting any legislation through parliament – particularly on a sensitive and historically intractable issue– will remain a potentially Sisyphean task.
Prior to Johnson’s election, Hancock had stated that he had been beavering away on his own solution to social care funding, namely an additional £3.5 billion-a-year from Treasury coffers, combined with a voluntary insurance model. This solution has been heavily criticised by the House of Lords Health and Social Care Committee, and the likely tax increases needed to fund this approach are unlikely to go down well with Hancock’s new Cabinet colleagues, or with the Conservative grassroots. Hancock may well be forced into adapting yet another policy to suit the changing political winds. The long-delayed social care green paper, which the sector has been awaiting since the summer of 2017 and is now provisionally slated for publication this autumn may be the first indication of whether the government’s approach to social care has changed, and how bullish it intends to be in pushing forward with its proposals.
Any new funding for social care is likely to be positive for investors. Hancock has already shown his ease with the delivery of health and social care services by private and independent providers, and innovation driven by the private sector will remain a key part of his strategy to make sure the UK’s health system is fit to meet 21st century demands. Innovative, cost-effective solutions to social care, public health and disease prevention are likely to be the order of the day, with healthcare businesses offering these solutions likely to benefit from government support and funding.
Energy
The appointment of Andrea Leadsom as Secretary of State for Business, Energy and Industrial Strategy (BEIS) is likely to signal continuity for the energy aspect of her brief, but businesses may be wary of her pro-Brexit stance. Leadsom’s predecessor, Greg Clark, was a committed Remainer who was incredibly mindful of the concern businesses felt over a possible no-deal Brexit. Leadsom, on the other hand, is openly comfortable with no-deal, something that is unlikely to sit well with the UK’s industrial and manufacturing sectors.
Leadsom is likely to combine green energy initiatives, like promoting electric public transport and decarbonisation, with advocacy for the continued use of gas, nuclear energy and fracking. She has previously stated that “fracking is one industry that represents a huge opportunity for the UK, and our regulatory environment for it is the safest in the world.” Leadsom has previously called for the end of renewable energy targets and was involved in the reduction of green energy subsidies during her tenure as Minister for Energy and Climate Change. However her approach to energy at BEIS is now likely to be tempered by her new boss wanting to showcase the government’s environmental credentials.
Johnson’s early statements on energy are good news for investors, having stated that he intends to ensure the private sector is at the forefront of efforts to tackle climate change. He has pledged to keep the current target for net-zero carbon emissions by 2050 and has developed a notable habit of referencing climate change in his speeches. Could this be to distract from the fact that little in the way of concrete policy has emerged so far? Brexit, and the extent of the Cabinet reshuffle, means that the long-awaited energy white paper is likely to be delayed until late autumn 2019 at the earliest. Key issues likely to be addressed in the white paper, when it emerges, include a new approach towards the funding of nuclear power plants and carbon capture and storage. Alongside this, BEIS and Ofgem are planning a shake up of the energy retail market and are currently consulting on proposals to ensure customers are able to benefit from a low carbon, flexible energy system. This is likely to include changes to the regulatory framework and measures to ensure energy remains affordable for customers following the end of the energy price cap, which is currently due to end in 2021. Given the consistent focus of Labour on energy prices and the behavior of utility companies in general, the Conservatives are likely to develop and adopt consumer protection and green energy policies as a priority to counter this narrative.
Outsourcing
The prevailing mantra of the Conservatives will continue, namely that the private sector is good for the public sector. Nevertheless, the post-Carillion approach to outsourcing within government is still in the midst of major change, with former Cabinet Office Minister David Lidington having published a new ‘Outsourcing Playbook’ to guide all government departments through the process of future outsourcing of public sector contracts. Lidington resigned from his post with work still unfinished on the social value aspect of the government’s new outsourcing policy, designed to act as an extension to the guidance laid out in the Playbook. While most of the work has already been completed, Boris Johnson’s libertarian instincts may push outsourcing reform further down the government’s agenda, meaning Lidington’s work may remain incomplete, at least for the time being. Lidington had been working towards the introduction of a social value model for outsourcing, which would ensure government considers the wider value of their contracts, rather than awarding them to businesses on cost grounds alone. It was hoped this would ensure outsourcers demonstrate transparency and a strong ethical background well before contracts are approved. This would mark a significant change of direction for a Conservative government, which has traditionally relied on a strictly market-based approach to outsourcing. Given that Lidington’s successor, Michael Gove, has defended the government’s outsourcing policy in the wake of Carillion’s collapse, describing its failure as “business-specific,” he may be keen to focus on other, more pressing matters.
The government will also need to find a replacement for Private Finance Initiatives (PFI), which were scrapped for new projects by Chancellor Philip Hammond at the 2018 Budget. It is highly likely that at least some of the major infrastructure plans currently being announced by Johnson and his team will need to be delivered in partnership with the private sector, something that the PM and his Cabinet are keen proponents of. Johnson has already discussed working with the private sector to improve regional bus services and increase green energy usage. How exactly he plans to work with private companies to finance his ambitious infrastructure plans is not yet clear, but investors can be almost certain that Johnson envisages a key role for the private sector in seeing his grand plans through to fruition.
Education
While new Education Secretary Gavin Williamson is something of an unknown quantity at the Department for Education (DfE), there is one aspect of his brief he has maintained a long-standing interest in: apprenticeships. Williamson has previously described apprenticeships as “vital” in reducing youth unemployment and has said that he wants them to be seen as “equal to if not better than, going to university.” We can anticipate that Williamson is likely to deviate from his predecessor, Damian Hinds, who largely focused on schools policy within his brief. Williamson has taken over direct responsibility for the old skills portfolio, including apprenticeships, signaling the importance with which the government views the issue. However, as the skills brief was formerly the responsibility of an individual minister, there are risks it will no longer receive the attention it needs from the new Secretary of State, who will have to balance the brief with other issues in his portfolio.
Other education policies have been dictated by Johnson in the form of early promises of funding increases. Education funding was in danger of becoming a toxic issue for the Tories during the final months of May’s tenure, with government statements on increased funding contrasting badly with tales of schools being forced to close early due to a lack of funds. Johnson has made it clear he wants to address this and has already pledged to increase the education budget by £4.6 billion a year by 2022-3. However, all this would do is return the education budget to its 2015 level, a settlement unlikely to satisfy the powerful teaching unions.
Responding to the Augar Review of further education will be a near-term priority for the new Education Secretary. Recommendations include a cut to tuition fees for domestic university students (a policy strongly opposed by Jo Johnson, Universities Minister and younger brother of the new PM). The report also calls for increased funding for alternative forms of higher education, which is likely to be viewed positively by Williamson and his new team. Williamson’s existing interest in apprenticeships will mean these recommendations are received sympathetically, while an increase in funding for regional further education colleges is also likely as part of the Prime Minister’s pledge to reinvigorate ‘left behind’ towns.
Transport and Infrastructure
Echoing his priorities as London Mayor, transport has been an early focus of Johnson’s, forming a major part of his strategy to create economic prosperity across all parts of the UK. In addition to the likely continuation of HS2 despite opposition from some in cabient (Andrea Leadsom remains strongly against the new line) Johnson hasn’t been deterred from announcing a new high-speed rail network from Manchester to Leeds as part of the Northern Powerhouse project. Further big transport projects are likely in the near future as Johnson tries to bolster his credentials as a Prime Minister unafraid of large investment projects, drawing a further clear distinction between himself and his spending averse predecessor.
The appointment of Grant Shapps as Transport Secretary suggests some big projects are on the cards. Until his appointment he was Chair of the British Infrastructure Group of MPs, championing greater investment in airports and broadband across the UK. Shapps is a vocal proponent of the Heathrow expansion and his appointment indicates that Johnson will be quietly sweeping his previous opposition to the project under the political carpet.
Rail is also likely to be in for a shake up. Shapps’ Welwyn constituency is a commuter town that was seriously affected by the Thameslink timetable meltdown in 2018 and he has previously called for Thameslink to be stripped of the contract with immediate effect. There is plenty in the way of both large-scale and shovel-ready infrastructure projects that Shapps could focus on, including the expansion of the East Coast Mainline and greater investment in modernising the UK’s rail network.
Beyond transport, Johnson has made an ambitious commitment to accelerate the roll out of full fibre broadband, bringing forward the government’s target for achieving national fibre coverage from 2033 to 2025. Johnson has made this a key part of his domestic policy platform, referencing it in every major speech he has given so far, though without providing any detail on how he hopes to achieve this. The pledge is ambitious given the roll out is dependent on the work of private companies, but Johnson has nonetheless put pressure on Nicky Morgan in her new role as Secretary of State for Digital, Culture, Media and Sport to deliver on the target.
Financial Services and the City
The appointment of Sajid Javid as Chancellor is likely to be one of the most complex for investors to negotiate. On the one hand, Javid is a former investment banker who knows the City and is sympathetic to its concerns. On the other, Javid has signed up to manage the finances of a country openly moving towards a no-deal Brexit.
In the run-up to October 31st at least, we can expect Javid to preside over the kind of spending increases that will make former Chancellor Philip Hammond despair. Having been in office only a week, Boris Johnson has already signed off on policies worth more than £9 billion, not including those made during the leadership campaign. It is now Javid’s job to find the money while doubling-down on no-deal preparations and ensuring the UK is prepared for the potential economic disruption that may come on its coattails.
On broader fiscal policy, Javid is likely to increase support for entrepreneurs and small businesses, potentially through tax cuts or other financial incentives. Investors should expect an emergency budget in October following the Conservative Party Conference, in which Javid will set out his plans in more detail. This is likely to include broad tax cuts to support the economy through Brexit-related uncertainty, and further investment in infrastructure and public services.
Since Johnson entered Number 10, he has been noticeably quieter on fiscal policy, preferring big infrastructure announcements to generate headlines. However, neither his supporters nor his opponents will let him forget the pledges he made during the leadership race, during which both Javid and Johnson set of a similar vision for taxation. Johnson’s most headline-grabbing pledge proposed raising the higher rate income tax threshold from £50,000 to £80,000. According to estimates by the Institute for Fiscal Studies (IFS), this would deliver a tax break worth £9 billion to 4 million people in the UK, with top earners benefitting the most from the changes. Javid also spoke in favour of tax cuts for high earners during the leadership debate, though he steered clear of any specifics.
How can we help
Much of Johnson’s early approach to government rests on generating economic optimism through high spending, and more widely by trying to harness what’s left of the UK’s joie de vivre. Nevertheless, there are clouds on the horizon and Johnson’s honeymoon period already looks swiftly to be coming to an end.
WA Investor Services can support investors in scenario planning for the new government in the months ahead, ensuring you are ahead of the curve when it comes to the restless world of policy and regulation in the current climate.